Soumik Kar

I still remember my days as the fund manager at DSP Merrill Lynch (now DSP BlackRock), when our team would regularly feast on pizzas, which soon became a periodic ritual. Such was the craze that we even looked into if there was a way to play the growing interest in pizza. Unfortunately, even though Domino’s was doing brisk business back then, it was an unlisted entity. But when I went solo in 2009 with AlfAccurate, I got lucky because the very next year, Jubilant FoodWorks (JFL), which is the master franchisee of the US-owned pizza brand in India, Nepal, Bangladesh and Sri Lanka, went public. The company, which had opened its first Domino’s Pizza store in India in January 1996 at New Delhi, saw a stunning debut, raising ₹330 crore and ending day one at ₹229 with 58% gains against its issue price of ₹145 and a market cap of ₹1,456 crore. In five years, its market cap has gone up nearly 7x to ₹9,700, with the firm clocking a CAGR of 34.52% till FY15, with 959 outlets currently. The superlative performance is not without reason.

Time to say cheese

India’s organised food service industry is estimated at $2 billion compared with the overall industry size of $94 billion; the former’s growth rate is 13% against the latter’s 10%. That speaks about the size of the opportunity organised food chains have in India over the next five years, which has us excited about Jubilant. We follow the Triple M approach before we invest in any company:

Size of the market: In case of Jubilant, the sheer size of the market is huge (by 2020, the industry is expected to touch $155 billion). It is growing at a healthy rate of more than 10% due to growing urbanisation, increased youth population, higher disposable incomes and more working women. The chain restaurant service is also set to grow faster than the overall industry due to the hygiene factor and the rising aspiration for branded products. The growth of quick service restaurants (QSR) is also higher than the average industry growth, and so is the pizza and pasta category.

Market share: We invest in a company only if it is among the top five players in the industry, that too, with a profitable market share. JFL enjoys a leadership position, with a 67% market share in the segment in which it operates. For us, the recipe for success in this industry is innovation and guest-centric business strategy. JFL has mastered the art of innovating products, running innovative marketing campaigns and connecting with customers in innovative ways. Its ‘30 Minute or Free’ campaign in 2003, launch of a ₹35 pizza in 2009 and expansion of product offerings to tacos and Lebanese rolls (2012) are illustrations of the company’s understanding of consumer mindsets and its agility in responding to changing business dynamics. The company was also the first in the food industry to launch online and mobile ordering.

The average contribution of online orders to delivery sales increased from 27% in Q2FY15 to 36% in Q2FY16; mobile orders improved from 21% to 30% during the same period. Innovation is the key to success in the QSR business and we think that JFL has developed a competitive edge in the business by constantly being ahead of the competition. Importantly, it runs innovative strategies, always keeping the guest at the heart of the strategy.

In fact, its customer promise is to the effect of, ‘If you are not fully satisfied with your Domino’s Pizza experience, we will either make it right or refund your money!’ Such a policy framework speaks to the company’s attitude towards its customers. With guest-centricity at the heart of its operations, it is not surprising that JFL is the pioneer in customisation efforts for both the pizza and donut segments, including menu customisation to match local requirements, introducing the right price point and delivering within timelines.

India is at an inflection point in terms of growth opportunities over the next three to five years, as mentioned earlier and JFL is expanding aggressively to capitalise on this. In the initial 15 years (1996-2010), the company opened 306 stores. In the past five years alone, however, it has opened 570 stores and plans to open another 150 in FY16. Its headcount numbers have also increased simultaneously from 8,196 in FY10 to 29,000 in Sep 2015. This aggressive growth strategy will start bearing fruit as sluggish consumption trends revive. Early signs of a revival are already visible, as same-store growth, which was 0% in FY15 (30% in FY12 and 16% in FY13), has now slowly improved to 3% in Q2FY16. JFL’s performance was significantly better than its immediate rival Yum! Brands (Pizza Hut), which reported 18% de-growth in same-store sales in Q2FY16. This further proves the point that despite tough market conditions, JFL has the ability to outgrow the competition.

The company reported a threefold increase in revenue from ₹670 crore in FY11 to ₹2,090 crore in FY15. However, operating margin declined over the past five years from 17.96% to 12.55 %. This is mainly due to store expansion, which saw rent costs going up by 3.84x, higher advertisement and promotion costs, which went up 4.3x and the initial cost for scaling up Dunkin’ Donuts, which the management expects will break even when it reaches 125 stores (66 stores at present). However, gross margins continued to remain 78% during FY11-15, reflecting a strong underlying business profitability.

Margin of safety: As mentioned above, JFL is the biggest beneficiary of changing Indian demographics, suggesting an opportunity for more number of stores. As consumer demand revives, same-store growth will also improve and as that happens, operating margins also have the potential to improve. JFL is also the right choice for any international player to enter India, considering its understanding of Indian consumers. This makes us believe that JFL is valued attractively considering its growth potential over the next few years. We believe that with its strong innovative approach to business, JFL has the potential to engineer wealth creation for investors, going forward.

The stock is owned by AlfAccurate Advisors in its PMS plan. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. AlfAccurate and its affiliates, officers, directors and employees worldwide, including persons involved in the preparation or issuance of this material may, from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned

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